Walgreen to spend $6.7 billion on Alliance Boots stake

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Walgreen Co. will pay $6.7 billion in cash and stock to buy a stake in European health and beauty retailer Alliance Boots, a deal that would give global clout to a U.S. drugstore chain struggling with slipping sales in its home market.

The combination would create the largest single purchaser of prescription drugs in the world and give Walgreen access to emerging markets like China and Egypt, company officials said Tuesday in announcing the deal. However, it also will plant the biggest U.S. drugstore chain in a continent beset by debt worries from Greece, Spain and other nations.

But Walgreen said Alliance Boots brings in revenue from some of the most stable countries in Europe. CEO Greg Wasson told analysts the acquisition is "a truly game changing step" for his Deerfield, Ill., company.

"We think the opportunities both in the U.S. and across the globe are really powerful," he said.

Investors weren't so sure about the deal. Walgreen shares dropped more than 6 percent, or $1.95, to $30.01 in Tuesday morning trading while the Standard & Poor's 500 index rose slightly.

Walgreen plans to initially spend about $4 billion in cash and contribute more than 83 million shares for a 45 percent ownership stake in Switzerland-based Alliance Boots, which runs more than 3,300 health and beauty retail stores in 11 countries.

Walgreen then has an option to buy the rest of the company in about three years in a deal valued at around $9.5 billion based on Walgreen's share price and the current exchange rate.

The privately held Alliance Boots runs the largest drugstore chain in the United Kingdom, where the company brought in $10.5 billion (6.7 billion pounds) in revenue during the fiscal year that ended March 31, according to its website. It has more than 2,400 health and beauty stores there, most of which include a pharmacy.

The deal comes while Walgreen works through a sales slump prompted largely by a split with pharmacy benefits manager Express Scripts Holding Co. Walgreen has seen sales fall for several months since it stopped filling prescriptions for Express Scripts, the largest U.S. pharmacy benefits manager, at the end of last year.

On Tuesday, Walgreen also said its fiscal third-quarter earnings dropped 11 percent to $537 million in part due to the Express Scripts break. Revenue slid 3 percent to $17.75 billion.

Walgreen said it expects the Alliance Boots deal to add between 23 and 27 cents per share, excluding transaction costs, to its earnings in the first year after it completes the initial step.

Alliance Boots also runs stores in Norway, Ireland, the Netherlands, Thailand and Lithuania and has a pharmaceutical wholesale business that supplies health care providers in 21 countries. It went private in 2007 in a $17.4 billion (11.1 billion pounds) takeover that involved private equity firm Kohlberg Kravis Roberts & Co.

Aside from gaining exposure to foreign markets, Walgreen's acquisition also will allow it to sell Alliance Boots products in the U.S. That includes No7, the United Kingdom's leading skin-care brand.

Wasson told analysts during a Tuesday morning conference call the deal helps several of his company's key strategies, including a goal of transforming drugstores into a "health and daily living destination."

However, an analyst told Wasson that an investor saw the acquisition as a desperate, "Hail Mary pass" from Walgreen.

"We've been working on this for over 18 months, so it's certainly not a Hail Mary," Wasson said. "We think there's some tremendous value creation from these two organizations coming together."

Walgreen said the pharmacy-led retail and wholesale businesses of both companies will continue to operate under their already established brand names, and there are no plans to cut jobs at either company because of the deal.

It expects the purchase of its initial stake in Alliance Boots to be completed in September.

Walgreen also said Tuesday its board raised its quarterly dividend 5 cents to 27.5 cents per share from 22.5 cents. The dividend will be payable Sept. 12 to shareholders of record on Aug. 17

The chain operates 7,890 drugstores in all 50 states, the District of Columbia and Puerto Rico.

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